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Stockholm Syndrome

October 1, 2008 8:49 pmOctober 1, 2008 8:49 pm

On Olbermann a few minutes ago (that basement classroom with the heavy paper over the windows and camera sure has come in handy lately!) a phrase popped out of my mouth: “Stockholm Syndrome”, with regard
to the bailout rescue.

Here’s the thing: it’s very hard for Congress to originate complex financial rescues, so it’s normally up to the executive to put things together. Unfortunately, Paulson came up with an awful plan.
Ideally, the Dems would have ripped the thing up and started over, but that was never realistic. So instead they made it significantly better, but still building on the original, misconceived structure; it became
better than nothing, but not good.

And then it failed in the House, so the Senate has larded it up, with stuff like SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.

I think that Congressional leaders know that it’s a bad bill, but feel compelled to defend it, because they’re (rightly) scared of the financial consequences of a second rejection. And to some extent economists
like myself are in the same position; I think I called it the “hold your nose caucus.”

So am I for the bill? Yuk, phooey, I guess so. And I’m very angry at Paulson for putting us in this position.

The urgency of the bailout is being sold to us with stories of widespread Main Street problems in getting access to borrowing, due to the bank capital crisis. But isn’t the sharp decline in loans and commercial
paper also the result of solid lending decisions in the face of declining business prospects, thanks to the post-bubble collapse of consumer spending that drove so much GNP growth in recent years? Aren’t
the declining creditworthiness and loan demand of business borrowers having an impact on the strength and credit risk of banks?

Our fixation on the bailout implies that bank capitalization is the sole problem, ignoring the weak underlying market for business borrowing. Both problems stem from the collapse of the housing bubble, but as you’ve
pointed out, declining Main Street business prospects and creditworthy loan demand can’t be improved by the bailout.

I mention this because the bailout itself is now being viewed as the key factor for success or failure in the economy, diverting attention from continuing economic issues attributable to White House policies and
Wall Street practices that pumped up the housing, debt and securitization bubbles.

Is it really so hard for congress to put together a little bill to authorize a debt for equity trade for $150 Billion and buy themselves some time? Everyone is stuck on this $700 Billion number, which was pulled
out of thin air. Is Paulson planning on buying all the bad CDO’s the next day?

Why not throw your support behind the DeFazio “No BAILOUTS Act”? What do you think of it as policy? It seems to do the key thing – inject capital into deserving banks rather than buy up bad
debt. Giving it a good run least lets the Democrats stand up for something defensible – even if there is an eventual compromise – at least it creates a better bargaining position. Then maybe we
won’t have to say “Yuk, phooey, I guess so.”

Paul, if your house was on fire and someone came up with a gas can and said he would throw the gas on the fire and it would put out the fire because it is wet … would you let him do it?

Alright, I am not a yahoo and and I don’t subscribe to Mother Jones, either … but it is clear to me the risks of the this bailout being passed and the economy failing anyway far exceed the risks of
carefully crafting a bill the actually accomplishes something useful.

There are other forms of capital besides money. If the bailout fails, it squanders one form of capital thing that the government still possesses this minute, institutional credibility. If the bailout fails, the
US government may as well take a permanent cruise to Antarctica.

The government would actually gain more credibility by refusing to consider any actions until after the elections. The markets would go to sleep until the middle of November. The panic would subside and some hearings
could be held in the interim.

This crisis has a trust element. It is effectiveness, not exertion, that stimulates trust.

OK, so unlike Iraq no one is arguing about the existence of weapons of mass destruction. The question is just how toxic they really are. Re-doing the sub-prime loans made since 2005, with all the shenanigans that
went on, is basically a non starter. The only residual value in most of these is the value of the property which continues to decline. Purchasing these mortgages would be a salvage operation, a long term operation.
The main reason for the rescue plan is to restore confidence in the system, the quicker the better. So Paulson gets 1/2 the money now and has to prove it works before he gets the rest. Of course by that time
it’ll be time for Paulson Jr.

It’s a shame this once worthwhile nation has squandered everything that ever made it great: leadership, a strong, growing economy based on manufacturing, our reputation as a world leader. We’ve traded
all of the above for greed at every level of society, worthless fops who pose as leaders, but are really interested only in power and money for themselves and their cronies, and businessmen who don’t
know the meaning of the word business. We delude ourselves with magical thinking and mood altering pharmaceuticals and cry furiously when we are forced to look at the absolute mess we’ve made of our nation.
Then we roll up our sleeves, and pretend to work on solutions to our myriad problems, while in actuality, we are each feverishly seeking a way to profit from the latest fiasco at the expense of someone else.
How pathetic we’ve become. Perhaps we’ll be voted off the planet.

How about ‘no’? How is this bill “significantly better”? How does it make the average person’s life better or easier? Adding billions to the national debt–which now stands
at $10 trillion–means there won’t be money to fix the economy, help senior citizens, get health care coverage for kids, or provide for permanently injured soldiers returning from Iraq.

I’m not for the bill. It’s still a bad bill. It’s no better than the first bill that failed. The panic and the bailout are being rammed down everybody’s throat. It’s the same panic
that led the run-up to the Iraq War, the PATRIOT ACT, and all the other pieces of legislation that have drastically expanded government surveillance power.

We shouldn’t accept any bill unless it’s a bill that accomplishes something other than one crafted in panic mode.

So, Secretary Paulson puts out a skimpy, 3-page plan, that probably took all of 30 minutes to write up, and now the Democrats have no choice but to follow Paulson’s framework, because… I guess we’ve
put too much work in to start over now? I think you’re excusing the Democrats too easily Professor.

I am not certain that Congress and the public understands that buying the so called toxic debt only helps the banker if we pay too much for it. Selling garbage worth twenty five cents on the dollar to the Govt.
for twenty five cents does not help the balance sheet. It is obvious that Paulson plans to pay fifty cents for twenty five cent junk. Bankers, who are as smart as most people and are familiar with the junk they
own will save the best for themselves. They will tender the worst stuff. The public will lose and the costs will multiply with rampant fraud. We will regret this action for the next decade.

Now is the time for thought leaders like yourselves to step up and say how awful this bill and provide a viable alternative (i.e. direct equity infusion). When someone with your economic background and respect simply
gives up and is OK with the passing of a terrible bill because it is something, it is a very sad day for America. This is truly a situation of taxation without representation and American’s like yourself
should revolt rather than simply take it as politics as usual in Washington. I’m extremely sad and disappointed in your and America today.

Hold your nose? I am at a complete loss to understand how this warmed over trickle-down plan could possibly lead to economic benefit. Paulson plans to stuff hundreds of billions of dollars into the top layers
of the financial pyramid. After the $5 trillion of alphabet soup toxic SIVs, swaps, CDOs, MBSs, … sop up these meager $700 billions there will be nothing left to help the lower levels of the pyramid.
You know, the folk out there with underwater mortgages whose defaults got this mess started. That means that there will be more defaults and that means this this will keep on getting worse. Ok, it will get worse
for you and me, not the fat-cats at the top who get the first $700 billion.

People get the government they deserve. We as a society have too many amongst us who are simply ‘apologists’ for the short-coming of our institutions. I do not believe Congress had no other choice
than to simply lard up something existing. The media reports the nations ‘lost’ $1.2 trillion when the Dow declined 777 points, but is absolutely silent on quoting ‘found’ $749
suddenly created 24-hours later via Tuesday’s 485-point re-bound? Why? Is it because such back-2-back fictitious numbers forces attention to the stupidity of parroting the first number? Yes, that’s
it. The media should have taken the next step to focus on how the Dow is not a non-political barometer of the financial system’s health and therefore Congress is not justified and not excused in kow-towing
to terms dictated by Wall Street. But…just silence on this. Or contortionist-type apologizing by some NYT columnists. How can us ‘thinking’ voters (but only the vertebrates amongst
our group), decouple from this insolvent and sinking nation of deadweight non-vertebrates (timid thinkers and otherwise), aka NYT editorial board and certain columnists, clueless congresspersons and clueless
administrations and their multitudes of clueless voters?

I don’t understand why “it was never realistic” for Dodd et al. to not just reject Paulson’s 3-page plan out of hand. That’s what you *do* when your counterpart in a bargaining
session makes a perfectly ridiculous first offer — either you reject it and say, “get serious, start over”, or else you make a perfectly ridiculous counter-offer. Something involving ponies
for all, or tumbril rides for CEOs — whatever works.

Stockholm Syndrome is where you start identifying with the terrorists who kidnapped you, right? Like when the working class votes for the plutocrats, because, hey, they might get to be rich themselves, if they give
the last of their money to those obviously smart rich guys who already robbed them blind.

Hmm. Paul, could you give those of us who are not economists a hint at what the “Stockholm Syndrome” is? I did get a nice chuckle out of your “hold your nose caucus.” A lot of us have
been part of that caucus for the past eight years.

A whole lot of people are trusting your judgment here, Dr. The Democratic blogs are riven, with a narrow majority saying there’s no way the Treasury won’t lose massive quantities of money on these
toxic securities, and that in fact the government has to wildly overpay (and lose money) for the Wall Street companies to actually be rescued by this plan. The other side of the argument has pretty much been
reduced to “but, but, look at Krugman and Galbraith and Obama!”

Given that these are the activist and media channels that would be required for this bill to be stopped again in the House, know that it’s mostly your personal authority (well, and Barack’s) that is
sidelining them. If this bill picks up Democratic votes in the House, it’s largely because citizens backed off, which is largely because they trust you and a few others like you.

Your vote really does count, maybe more than Rep Holt’s does. If you’re THIS reticently and ambiguously for it… well, just be aware that however reluctantly you have lent it, your voice is carrying
great weight anyway. If there’s any possibility of non-Paulson language being written and passed by Dodd/Frank, then for the love of God speak loudly and aggressively now.

I guess the question on my mind is why the Dems didn’t tear it up and start from scratch. Too politically risky for the whole thing to be on their plate? Veto? Too hard to herd cats (dems) into a coherent
plan in a reasonable amount of time? Still looks like they’ve been stampeded from way out here.

The Senate did not “lard up” the bill with these tax cuts. The tax cuts had already been passed by the House in March as H.R. 1424; all the Senate did was graft the provisions of the bailout onto H.R.
1424 as an amendment. This was needed because budget bills can’t originate in the Senate, but they wanted a workaround so the Senate would get to vote first anyway. Please don’t mislead your readers
into thinking that somebody added new giveaways to sweeten the bill so that it would get passed.

I am very pleased that you have been on Keith Olbermann’s show–you have a great way of distilling the information into something that I understand and I appreciate it. Who knew economics could be so
compelling? Well, it is when it hits me in my pocketbook-but you make it easy. Thanks very much. …And, no-I am not Mr. Krugmans’s mother nor am I related to him in any way. Just wanted to tell
him how much I admire his commentary.